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Old 01-16-2009, 06:41 PM
 
1,151 posts, read 2,987,833 times
Reputation: 252

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One problem with your analysis is you're using made up numbers that defy reason. Your premise is based on the bank being able to sell a "$375,000 home" for only $300,000, and therefore when it "trades" the house for a $375,000 mortgage, it is reducing its losses. But then you assume that the "$350,000 home" could also be sold for at least $300,000 (the same price the bank could sell the $375,000 home for). So there is one deviation from reality.

But even if those numbers were true, the bank started off with one $375,000 note, one REO worth $300,000 (although its "true" worth is apparently $375,000), and a lien on a home worth $300,000 (although its "true" worth is apparently $350,000). After the shell game, nothing is changed for the bank except that the home that it now owns has a "true" worth of $350,000, and the home on which it has a lien has a "true" worth of $375,000. No net gain for the lender. So even with the monkey math, this only helps the borrower.

Quote:
Originally Posted by ccmusica View Post
The bank already owns this house, so unless someone gives them $375,000 cash, they are giving away the house, which obviously that won't do. So let's assume that someone will loan the borrower $375,000, so the borrower can pay cash to the REO bank... who is going to pay off the borrower's existing $375,000 mortgage on the $300,000 house? Someone will have to pay it off, otherwise the borrower will have 2 mortgage payments.

I didn't bring this up before because it just adds another potentially confusing detail to the discussion. I was told by HUD that the way this would work would be that the borrower's house would be returned to the lender and the loan retired through a banking instrument similar to a "Deed In Lieu Of Foreclosure" but without the credit consequences of a foreclosure. This would retire the loan by returning the collateral. You are focusing on the consequences to the borrower. In contrast, the lender has to account for real dollars, not just credit consequences. The only way to 'retire' the loan on the bank's books is to receive $$ or to book a loss. The borrower would then enter into a new loan for the REO with the same lender, thus only one loan outstanding. You cannot actually legally swap collateral on a loan between properties. Says who? This is not a universal truth, so there would have to be something specific about residential loans to create this prohibition.

For the bank to be able to sell it for enough to retire the mortgage (which is $375,000), it would have to be worth $375,000, plus commissions and other closing costs, and if it was, the borrower wouldn't have wanted to trade up.

At this point, the mortgage would already be retired (see annotation above) and the bank would sell the lesser valued house for whatever a buyer is willing to buy it for (which the bank has already calculated ahead of time) OR go through another trade-up. If the bank got $350,000 for the lesser valued house, they are still ahead by $50,000 over what they would have gotten if they didn't do this program (remember, they were willing to sell the REO for $300,000 and they probably would have gotten less for it). How could the bank possibly get $350,000 for a house with a "true" value of $350,000, when it could only get $300,000 for a house with a "true" value of $375,000?

How? The bank gets $75,000 over their asking price which is what they were willing to accept on the REO ($300,000). The bank didn't "get" $75,000 over their asking price. In fact, the bank didn't "get" any money. The bank "got" another house. And that house was not worth $375,000. The house that had an original loan for $375,000 was sold for $350,000, the bank loses $25,000. Again, if a $375,000 could only sell for $300,000, how does a $350,000 house sell for full price?

So take the $75,000 they didn't receive over what they would have gotten without this program, and subtract what they lost on the borrower's house, $25,000 (based on an REO discount that is magically much lower than the REO discount on the $375,000 house), and they have a net "gain" of $50,000. If the borrower's house only sold for $300,000, the bank would still be ahead $25,000 over what they would have gotten if they didn't do this program. But if the REO discount factor is equal on this home, it would sell for well below $300,000.

You seem to think that this program is for the bank to break even between the borrower and the bank. No, I don't. I see that under the program, the bank's losses increase. It is not. It is designed to mitigate losses. There will be losses either way for the bank, it will just be less with this program. Without doing this program, the most the bank would get from just selling the REO would be only $300,000 or less, potentially losing the $50,000 that it could have made (or putting it another way, reducing its losses by $50,000) by participating in the program. According to the magically changing REO discount factor.

Outcome:

Borrower gets a home with a value equal to his loan but keeps his original debt with the bank. No, his original loan was "retired," remember. This is a new loan. He would be less likely to default from being upside-down.

Bank makes $50,000 more than it would have otherwise. The bank doesn't "make" anything until it sells a house, and it is simply unrealistic to think that the bank could sell a less valuable house for more than it could sell a more valuable house. Bank can now take borrower's house and offer it for trade up and mitigate (reduce) losses once again. And so on and so on.

The bank mitigates (reduces) losses and also stems more potential foreclosures. Foreclosures hurt borrowers, but they only hurt banks because they flood the market and because of an REO discount and foreclosure costs (which have already been paid on the $375,000 house). Even though the $350,000 home was not foreclosed upon, the bank still has to put a house on the market (i.e. flood) and that house still has to have an REO discount. That is the black and white of it. Because the REO sells for $75,000 more than it would have otherwise, this helps to stabilize housing prices, therefore stabilizing market values rather than the free-fall it's in right now.
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Old 01-16-2009, 06:50 PM
 
1,151 posts, read 2,987,833 times
Reputation: 252
Quote:
Originally Posted by ccmusica View Post
The price of the house has nothing to do with it. This is about what the bank can net in return (or rather how much they can reduce loss). Of course the price of the house has something to do with it. You can't calculate what the REO bank is getting without putting a value on the lower priced home. You've already acknowledged that in Post #117. What is part cash and part trade-in? The consideration that the REO bank gets in exchange for the $375,000 home.
What does the REO bank get in exchange for the higher priced home? They get a lower priced home, and a $375,000 note. Well, they already had a $375,000 note from that borrower, which is being "retired" apparently. See, the borrower already owed the bank $375,000 before the swap, and after the swap the borrower owes the bank $375,000, so the bank is getting no additional money from the borrower, it's just getting a house (which is worth less than the house the bank is giving to the borrower).
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Old 01-16-2009, 07:12 PM
 
Location: Grand Prairie, TX
82 posts, read 145,012 times
Reputation: 14
Default Austin-Willy

Quote:
Originally Posted by Austin-Willy View Post
What does the REO bank get in exchange for the higher priced home? They get a lower priced home, and a $375,000 note. Well, they already had a $375,000 note from that borrower, which is being "retired" apparently. See, the borrower already owed the bank $375,000 before the swap, and after the swap the borrower owes the bank $375,000, so the bank is getting no additional money from the borrower, it's just getting a house (which is worth less than the house the bank is giving to the borrower).
Austin-Willy, I don't know how else to say it. For some reason I have stated it as plain as day (I think) and you are not seeing it, so I am not communicating it well. I don't know how else to convey it, so I guess we are at an impasse here.

I know by your simple analysis it appears to be the way you see it, but it isn't. Not your fault, mine for not being able to communicate it better. Thanks for your interest anyhow. The dialog between us has given me fodder for a FAQ page.

I am very excited to say that I have been invited by the gentleman from the Federal Reserve Bank of San Francisco to attend a "Stabilizing Communities Series: Acquiring REOs in Compliance with NSP" sponsored by the Federal Reserve Bank being held in Fresno, CA next month. This will be a presentation and discussion of ideas between people in the industry.

I had emailed HUD about this, as I said before, and this was one response:

"Thank you, Christine. I have heard the concept of lender owned homes
with existing homebuyers paying rent until the market turns around. And
I think it has real merit. And your rendition is much more complete.
The biggest issue would be the managing of all their property. But that
could be solved easily enough. I would like to show this to my friend
at the SF Federal Reserve Bank who is dealing with many of the banks
regarding this issue here in the Central Valley. Let us roll it around
and then perhaps we can call you and talk about it some more. I love
your creativity and win-win approach. You are so right to focus on the
need for stabilizing the market."

...and from his friend at the SF Federal Reserve Bank:

"I have to agree with.... This is quite an innovative approach to stabilizing communities and is worth bringing into the discussions. I'll definitely begin shopping this idea around and would be willing to further discuss it.

Thank you very much for sharing your idea."

The latter is the guy who sent me the invitation. This should prove to be very interesting.

Take Care
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Old 01-16-2009, 08:33 PM
 
Location: Great State of Texas
86,052 posts, read 84,253,512 times
Reputation: 27718
If they can't afford a mortgage payment, what makes you think they can afford rent which has to account for taxes and insurance ?
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Old 01-16-2009, 09:01 PM
 
Location: Grand Prairie, TX
82 posts, read 145,012 times
Reputation: 14
Quote:
Originally Posted by HappyTexan View Post
If they can't afford a mortgage payment, what makes you think they can afford rent which has to account for taxes and insurance ?
I don't know. I think it is a silly idea, personally.
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